Streetwise Professor

August 15, 2015

Is Elon Musk’s Flim-Flam Beginning to Unravel?

Filed under: Climate Change,Economics,Energy,Politics — The Professor @ 7:03 pm

I’ve long been an Elon Musk skeptic.  He struck me as Harold Hill-esque con man, and an aspiring cult leader.

Izabella Kaminska at FT Alphaville has come to the same conclusion. (I appreciate her giving extended play to my posts on Musk, and for pointing out that I’ve “never bought the hype.”) Her last sentence says it all, in a rhetorically questioning kind of way: “Who was it again that said “the bigger the lie, the more it will be believed”?”


There are some major cracks beginning to show in the Musk facade. The most telling is the fact that one Musk entity-SolarCity-sold $165 million in bonds (that are backed by the cash flows from SCTY’s solar installations) to another Musk entity, SpaceX (which just experienced an embarrassing spacecraft malfunction.) When money is taken out of the left pocket to put into the right pocket, eyebrows should be raised. Especially when the explanation is this lame:

So why is SpaceX buying these up? According to SolarCity’s Vice President of Financial Products, Tim Newell, the answer is “very straight forward.” The bonds offered SpaceX an attractive rate of return for a one-year investment compared to other investment options out there. SpaceX carriers a fair amount of cash at times, noted Newell, and the company wanted to put that cash to work in the short term with a high degree of reliability

Sure. If it’s offering such a great rate of return, why isn’t anyone else buying it? And why does it have to offer a better rate than “other investment options out there”? A more plausible story is that the bonds weren’t selling, or that they would only sell at yields Musk didn’t want to pay, so  he had to use one of his companies to prop up another. Those kinds of shell games can only last so long.

Moreover, some executives have left, most recently the head of service, who is taking a leave of absence. This follows the departure of the CFO (announced in June).

Then there is the recent Tesla earnings report, which showed that despite the massive subsidies it has received, it still can’t earn a GAAP profit and, and is burning cash at a hellacious rate, $565 billion million* in the last quarter alone. Further the company revealed that it almost certainly will miss its sales target of 55,000, perhaps by as much as 10 percent. The introduction of the Model X is being pushed back yet again. The company had been counting on China for future growth. Performance there had been disappointing, and China’s current economic troubles (which include a huge automobile inventory overhang) make it an unlikely future savior.

But Musk responded in his typical supercilious fashion:

Rather sanctimoniously, the carmaker said that it would prioritise “a great product” over quarterly numbers. Investors have probably understood that by now. Just in case of doubt, Mr Musk followed up on the earnings call with: “We don’t want to set high expectations . . . Winning needs to feel like winning.”

Just a suggestion: channeling one’s inner Charlie Sheen is probably not a good idea.

There is also a medium-to-long term risk for Tesla, and a deliciously ironic one (though it is somewhat hedged by SolarCity). Specifically, Musk is a anthropomorphic anthropogenic climate change true believer who touts electric automobiles as a way of combatting it. The EPA’s recent proposed regulation of CO2 is also targeted at climate change. Though by its own admission will do virtually nothing to ameliorate temperature increases, the regulation will make electricity much more expensive: that’s a certainty. Estimates are in the range of 10-20 percent. That makes electric cars that much less attractive. Higher energy costs will also reduce income, leading to lower demand for Tesla vehicles, but will also reduce the demand for petroleum, which will lead to lower gasoline prices which will also negatively impact demand for Teslas: the EPA regulation will therefore cause both income and substitution effects that are harmful to Tesla (though again SolarCity will benefit from the EPA plan). Meaning that one green dream will cannibalize another.

For those who see Tesla as more of a battery company than a car company, higher electricity prices hurt the storage battery business too.

But no doubt Elon will turn his attention to doing what he does best: importuning the government to subsidize him. I lay heavy odds that we will see an effort to increase or extend subsidies to electric vehicles with the specific purpose of offsetting the effect of EPA regulations on the sales of electric cars. Just watch. If the markets are becoming less enamored with Elon, there are still plenty of suckers for his shtick in government.

*Thanks to commenter Highgamma for catching this.

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  1. Interesting post. I’m certain that part of any plan to offset the impact of the new CO2 regs will include electric car subsidies. That only makes sense to this administration.

    BTW, change 565 billion to 565 million before someone cites you. 🙂

    Comment by Highgamma — August 15, 2015 @ 9:42 pm

  2. Hi Professor,

    Could you please detail your reasoning about the EPA CO2 reduction reducing petroleum demand and gasoline prices?

    Also, why would higher electricity prices affect battery demand as well?

    Really happy to have found you blog, I’m learning alot.

    Thank you


    Comment by Adrian — August 16, 2015 @ 12:19 am

  3. Only partly related, but on itself just as revealing, was this recent German TV-docu:
    (the fairy tale of electro-mobility)

    Related: acellerated state-subsidy burning (national, regional & local), secret shift from production (batteries & drivetrain) to purchase (Asia vs Tesla(!))

    Online video (despite it saying available only up to 10 august, still worked today):

    (since German television has a nasty habit of geo-IP blocking: you might need something like Hotspot Shield)
    (their satellite-streams luckily can’t respect borders….:))

    Comment by Wilhelmus Janus — August 16, 2015 @ 5:43 am

  4. […] Streetwise Professor, it seems that Izabella Kaminska is also a skeptic of Elon Musk (our highest-paid government […]

    Pingback by Items | RWCG — August 16, 2015 @ 8:31 am

  5. Thanks, @Highgamma. I followed your suggestion and edited the post.

    The ProfessorComment by The Professor — August 16, 2015 @ 5:15 pm

  6. Are you saying that sales of Gin and Tonic are primarily determined by the price of the water used to make the Tonic?

    Comment by cig — August 17, 2015 @ 5:08 am

  7. Can you please elaborate on “higher electricity prices hurt the storage battery business too”?

    I was under the impression battery storage would benefit from a greater differential between peak and off-peak electricity pricing.


    Comment by Sylvain — August 17, 2015 @ 7:41 am

  8. Both Tesla and SolarCity have the potential to be real businesses that can make a profit. There is a legitimate need for better battery storage and household solar. However, there is no doubt their current business models are dependent on government subsidies and won’t work in a scenario where they don’t exist. Their markets will shrink dramatically once/if subsidies end. The restructuring will be painful and severely damage their stock price. Both technologies are prematurely monetized – they need between 5-15 years of technological development before they can reach their current market size unsubsidized.

    SpaceX buying these bonds is a huge red flag.

    Comment by Chris — August 17, 2015 @ 4:32 pm

  9. @Adrian: higher electricity cost->lower GDP/income->lower petroleum demand->lower petroleum prices.

    The ProfessorComment by The Professor — August 17, 2015 @ 7:09 pm

  10. I think you mean ‘anthropogenic climate change’.

    ‘Anthropomorphic’ is better used to describe Hillary.

    Comment by Ex-Regulator on Lunch Break — August 18, 2015 @ 2:55 pm

  11. @Ex-Good catch. Fixed.

    The ProfessorComment by The Professor — August 18, 2015 @ 6:37 pm

  12. […] Craig Pirrong at Streetwise Professor continues his Elon Musk skepticism. […]

    Pingback by August 23, 2015 « Pickerhead — August 23, 2015 @ 2:52 am

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